An increase in consumer confidence will:
A) increase both prices and output in the short run.
B) decrease prices in the long run, but output will remain the same.
C) decrease both prices and output in the short run.
D) increase output in the long run, but prices will remain the same.

Question

Quizplus · Accepted Answer

When consumer confidence increases, it leads to an increase in aggregate demand, which causes an increase in both prices and output in the short run. This is because firms increase production to meet the increased demand at the same time raising prices since they have more buyers. In the long run when firms can adjust their production levels and supply curve, higher confidence brings a permanent increase in the aggregate demand for goods and services, but the economy will have an output gain only with a slight price impact.

An Increase in Consumer Confidence Will